Secrets of the 'Start-up Nation'

If business history teaches us anything, it is that innovation is probably not in your organisation’s DNA.

With the probable exception of Leonardo da Vinci, Albert Einstein and Steve Jobs, it isn’t in many individuals’ DNA. Yet companies and countries continue to aspire to be innovative, hiring gurus, launching initiatives and making speeches. The history of Israel, a hub of innovation in a region, the Middle East, that isn’t exactly renowned for it, shows that innovation isn’t instant and has nothing to do with genetic code.

This year, Israel will have spent a higher proportion of its GDP on R&D than any other country on earth. It invested 4.25% of its GDP on R&D – slightly higher than South Korea’s 4.23%, and much greater than in the EU (1.95%) or the US (2.79%). This is a slight surprise – South Korea normally leads the world on this benchmark – but reflects an enduring commitment.

The government programme that has bolstered Israel’s strength in R&D and innovation started back in 1993. Yozma (Hebrew for ‘initiative’) effectively created the country’s venture capital sector. The programme set aside $100m to attract experienced venture capitalists to Israel. To qualify, investors had to raise $12m and partner with an Israeli in the VC fund. Yozma would then provide $8m in matching investments.

Yozma did not pick winners (which many other government schemes have tried to do, usually with scant success); it supported many small funds and created bonds between Israeli and international venture capitalists. Today, the country has a host of venture capital funds, which invest twice as much per capita as in the US. Whether you like or loathe this particular business model, venture capital has been integral to the expansion of Silicon Valley, the world’s most successful innovation hub, which has inspired a host of imitators named after fens, roundabouts and even countries.

Founded by the government and private investors, including Yigal Erlich, chief scientist at the Israeli Ministry of Infrastructure, Yozma was privatised in 1997. It has invested in more than 40 businesses in Israel, particularly in technology for communications, IT and healthcare, and has recently struck its first foreign deal, pumping $41.4m into a fund for Korean biotech start-ups.

Yozma’s success has helped underpin Israel’s brand as ‘The Start-up Nation’. In 2015, there were 1,400 start-ups and 69 new businesses were sold. Erlich says this approach suits the Israeli psyche. “We create start-ups and we sell them. The Israeli characteristic that gets things off the ground but is less interested in ongoing management means I don’t see this changing anytime soon,” he told The Times Of Israel newspaper.

Among the formidable array of research and development being conducted in Israel at the moment are a cosmic ray vest for use on Mars, packaging that prolongs the shelf life of food, an algorithm that detects breast cancer earlier and mind-boggling studies that trees look after each other and effectively behave as communities.

The country has produced several tech companies worth $1bn or more – notably navigation app Waze (acquired for more than $1bn by Google in 2013), software delivery group Iron Source and enterprise security firm Cyber Ark ­– and analysts expect several more start-ups to break the $1bn threshold in the next two years.

All this has helped diversify Israel’s economy and ameliorate some of the consequences of its fraught geopolitical situation. This year the Economist Intelligence Unit expects the country’s GDP to grow by 3.7% and the budget deficit to hover around 2.3% of GDP. On both measures, Israel is performing better than oil-rich Saudi Arabia.

Israel’s success as a nation of entrepreneurs is not entirely due to particular government programmes or initiatives. In part, it is a geological accident – it has no oil or lucrative natural resources to rely on – but it also, says Erlich, reflects the country’s culture. “We are willing to take risks and the public are willing to accept the failures of those that take risks,” he says. “The Koreans like to say that the most prominent Israeli characteristic is chutzpah. They mean this as a positive thing. A situation where a child cannot disagree with their parents – or an employee cannot disagree with a boss is a situation that suppresses entrepreneurship.”

There might be a lesson here for Israel’s neighbours as they seek innovative solutions to reduce their reliance on oil. The right government programmes can help, but innovation is ultimately about creating an environment that encourages original thinking and taking risks – and that may be awkward for governments that want, in a cultural sense, to protect the status quo.